Corporate customers

Risk in an Interconnected World

Linda ConradDirector of Strategic Business RiskZurich Global Corporate

Enhancing risk awareness and resilience to disruptions

Strategic Risk Management Solutions

Urban Land Institute Real Estate conference on Risk and Resilience in Coastal Regions

Discussion topics

1. Business Interruption, Contingent Business Interruption and the Value Chain 2. Business Resilience3. Enterprise Risk Management

Japan Tohoku Earthquake (03/2011)•Total economic loss estimate of $210 - 300 billion•Total projected insured loss estimate of over $35 - 40 billion•Initial report of estimated CBI loss between $5 - 15 billion•Many supply chain losses were uninsured (electric outages etc.)

Thailand Floods (4th Quarter 2011)•Total economic losses of almost $50 billion - Thailand's costliest•Total insured losses already at $15 billion but could surpass $20 billion•Portion of CBI insured losses still far from being settled•Many supply chain losses were uninsured

Understanding disruption impact

Peeling the Onion in Thailand

Head

W DIGITALThailandMedia

SEAGATE

W DIGITAL

HITACHI GST

SAMSUNG

Motor

NIDECThailand

TOSHIBA

MINEBEAThailand

TDK

TDK

NIDECPhilippines

ALPHANAThailandSEMCOChina

SAMSUNG

NIDECChina

Slider

SEAGATEThailand

HITACHISarawak

TDKThailand

FURUKAWAThailand

W DIGITALThailand

SEAGATEThailand

HITACHIThailand

TDKThailand

Suspension HUTCHINSONThailandHUTCHINSONNon-Thailand

TDKThailandTDKNon-Thailand

NHK SpringNon-Thailand

SUNCALLNon-Thailand

Actuator arm

MIN AIK TEC Thailand

Other components

CAL COMPThailand

Supplybottleneck

KEY

Market share impact

Pre-Flood1. Western Digital2. Seagate3. Hitachi4. Toshiba5. Samsung

Post-Flood1. Seagate2. Western Digital3. Toshiba4. Hitachi5. Samsung

Current Consolidation Activity1. Seagate with Samsung2. Western Digital with Hitachi3. Toshiba

185

Analysis of over 2500 disruptions

0 100 200 300 400 500

Lawsuits

Industry-wide (i.e., Market) Challenges

Physical and Regulatory

Demand Variability/Volatility

Financial losses and premiums

Sabotage, Terrorism, Crime, and War

Natural Disasters

Labor Unavailability and Shortage of…

Production Problems

Accidents

Source – Manchester Business School

186

Impacts of disruptions

Environmental

Human cost

Corporate image cost

Economic losses

Financial cost

0% 20% 40% 60% 80% 100%Source: Zurich‘s supply chain loss event database

187

Financial Consequences

< 1M1-10M11-100M101- 500M>500M

25%

20%

22%14%

19%

Source: Zurich‘s supply chain loss event database

188

Matching Duration and Impact

0% 20% 40% 60% 80% 100%

< $1M

$1 - 10 M

$10 - 100 M

$100 - 500 M

>$500 M

<1 week1 Wk - 1 Mth1 mnth - 1 yr1 - 5 yr>5 year

Supply chain disruptions increasingly impact financial performance

SC5(V1)Jul/05/10GC/ZCA

20-30% shareholder value impact

Discussion topics

1. Business Interruption, Contingent Business Interruption and the Value Chain 2. Business Resilience3. Enterprise Risk Management

191

Challenges to enterprise resilience

192

Zurich’s family of Supply Chain risk tools

Supply Chain Risk understandi

ng

Total Risk Profiling

Risk Room

NatCat -Location risk

Profit risk exposure

Disruption understanding

Business interruption analysis

Risk assessment

Provides macro country insights, e.g. political stability, economic status, labor situation

Provides exposure information for supplier locations in respect of e.g. floods, earthquakes, windstorm, related transport infrastructure

Enables a company to understand its total supply chain profit exposure in terms of a particular location, country or region

Helps in the understanding of the level and nature of disruptions in the particular industry or a particular location from a unique database

Helps a company model its relevant BI exposures

Formalised assessment of relevant areas which are part

of the due diligence process within the sourcing activity

Structured approach to defining risk appetite and

prioritisation for dealing with risks in the supply chain

Supply chain disruptions are more frequent

Zurich-sponsored BCI.org survey

Over 50% had more than one disruption

Nearly 85% suffered a supply disruption in 2012

194

Supply chain loss events – Auto disruptions

Zurich’s proprietary loss event database

supply chain can often drive greater risk inActions taken to drive costs out of the

supply chain can often drive greater risk in

Risk assessment stages

Develop a supply chain/value chain map

Gather key supply/supplier details

Evaluate risk factor information

Define and evaluate risk scenarios

Develop risk grading

Determine risk strategies

Determine those suppliers most critical to protecting profitability

Supply chain insurance can close coverage gaps

197

Top down approach to Business Interruption modelingReduction of total cost of risk at improved protection

Suppliers DistributionProduction ClientsSourcing

High protection

High protection

High protection

Customer

Business interruption modelling software

Map

Locations, buildings

Group of products

Customer/groups

Suppliers

Warehouses

Interdependencies

Scenarios

Calculation of effects

Risk report

Zurich Risk Room

http://www.zurich.com/riskroom.htm

Discussion topics

1. Business Interruption, Contingent Business Interruption and the Value Chain 2. Business Resilience3. Enterprise Risk Management

Enterprise Risk Wheel: the challenge

Where are the challenges in your risk landscape?

203

Scenario Planning

REP12(V2)Mar/03/10GC/ZCA

Process of visualizing:

1. what future conditions or events are probable,

2. what their consequences or effects would be like, and

3. how to respond to, or benefit from, them.

“what if…”

204

Total Risk Profiling

Outline summary of key risks arising from discussions (for further consideration)

Risk No

Vulnerability Trigger Consequence Likelihood Impact

1 One solution to the threat of both supply constraints and obsolescence isto re-engineer components or re-source. However, this may involve engineering changes requiring approval and this can be a protracted process.

Supply shortage generates need for re-sourcing and engineering change. Protracted approval process results in delays.

Contract delays and penalties

B 3

2 EngCo generally does not buy any replacement components directly from OEMCo and deals primarily with a number of intermediaries, and othersources

OEMCo insists that EngCo purchases director puts pressure on the others not to supply EngCo’s requirements at a competitive price.

Cost increases D 4

3 Over the years, EngCo has made various enhancements to parts. Some of these have been made without engineering change agreements and so there is little or no visibility outside EngCo

Supply change enforced, for example back to OEMCo

Quality deterioration, penalties

E 4

Structured approach to defining risk appetite and prioritisation of risk scenarios

A deeper dive

1. Identify critical assets and business drivers – profit, sharevalue, funding, production, etc.

2. Identify Impact - manufacturing facilities, production line (s), number of product (s), interdependencies etc.

3. Identify key suppliers - single source, IP, logistic nodes, critical parts / process / machinery etc.

4. Identify financial impact – Gross margin (BI and CBI worksheet) – Weeks of available production– Manufacturing schedule and make-up capacity– Demand (margin, balance of sale, market share, competition)– How long to replace and current inventory (safety stock)– Increased cost to acquire (shipping, tooling, molds, redesign, IP)

5. Disaster Recovery, Business Continuity Plan and other mitigation6. Supply Chain Risk Assessment and insurance for key suppliers

20

Scenario analysis

BI Loss, production alternatives

Zurich Velocity ERM software manages mitigation

Prevention

Correction

Risk

Consequences

Controls

Vulnerability

Mitigation Effectiveness

Mitigation Effectiveness

Categories

Triggers

• Risk financing• Risk transfer• Outsourcing • Controls Assmnt.• etc

Risk ToleranceSub-category

Context

Controls

Corporate customersLinda ConradDirector of Strategic Business Risk+1 410 664 5207linda.conrad@zurich.com

Enhancing your organization’s risk awareness and resilience

Strategic Risk Management Services

Thank youwww.ZurichERM.comwww.SupplyChainRiskInsights.comhttp://www.zurich.com/riskroom.htm https://itunes.apple.com/app/zurich-risk-room/id513235624?mt=8 https://play.google.com/store/apps/details?id=ch.zurich.zrr&feature=search_result#?t=W10.

The information in this publication was compiled by Zurich Services Corporation from sources believed to be reliable. We do not guarantee the accuracy of this information or any results and further assume no liability in connection with this publication, including any information, methods or safety suggestions contained herein. Moreover, Zurich Services Corporation reminds you that this publication cannot be assumed to contain every acceptable safety and compliance procedure or that additional procedures might not be appropriate under the circumstances. The subject matter of this publication as well as any of the examples, which are given for pure illustrative purpose, therein are not tied to any specific insurance product nor will adopting these procedures insure coverage under any insurance policy.©2012 Zurich Services Corporation

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